Appeal from the Judgment of United States District Court for the Central District of Illinois, Springfield Division. No. 78 C 3162 -- J. Waldo Ackerman, District Judge .
Before Fairchild, Chief Circuit Judge, Pell, Circuit Judge, and Campbell, Senior District Judge.*fn*
The issue in this case is whether the Commissioner of Internal Revenue erroneously included a life estate in the amount of $294,577. in determining gross estate of Beatrice F. Brantingham upon her death.
C. Alan Brantingham died testate on March 25, 1954 in the State of Massachusetts. He was a resident of Massachusetts at that time, and his will was probated there. The will, which had been drawn seventeen years prior to his death, contained the following provision:
"I hereby give, devise and bequeath unto my children, share and share alike, per stirpes, all of my property and estate of whatsoever kind or nature, now or hereafter acquired, subject, however, to the life use thereof, which I hereby give unto my wife, Beatrice F. Brantingham, and as such life user, my said wife shall have and is hereby given the uncontrolled right, power and authority to use and devote such of the corpus thereof from time to time as in her judgment is necessary for her maintenance, comfort and happiness."
Section 2056 of the Internal Revenue Code of 1954, 26 U.S.C. § 2056, provides for a marital deduction for certain interests passing to the spouse of the decedent. Interests eligible for the marital deduction are not included in the gross estate of the decedent, and are therefore not subject to estate tax. Interests which terminate after a lapse of time, including a life estate, do not qualify for the marital deduction. 26 U.S.C. § 2056(b)(1). There is an exception, however, for life estates in which the surviving spouse alone has the power to dispose of the entire estate "in all events". 26 U.S.C. § 2056(b)(5). Such life estates are eligible for the marital deduction. The Commissioner determined that the life estate devised to Beatrice Brantingham did not provide her with unlimited power of appointment, and therefore did not qualify for the deduction. Since Mrs. Brantingham could dispose of the principal of the life estate only for purposes of her "maintenance, comfort and happiness," she lacked the requisite control to qualify for the exception contained in 26 U.S.C. § 2056(b)(5).
On June 12, 1957, Beatrice Brantingham, now a resident of Illinois, petitioned the Circuit Court of Winnebago County, Illinois to be appointed trustee over the life estate left by her husband. She maintained the corpus of the trust, never making distributions of principal for her use or enjoyment until her death on June 2, 1972.
John Brantingham, the executor of Beatrice Brantingham's estate, did not include the life estate in question as part of the decedent's gross estate on her federal estate tax return. The Commissioner determined that the life estate should be included and issued a notice of deficiency. The plaintiff-executor paid the assessed deficiency and filed a claim for a refund with the Internal Revenue Service. The claim was denied and plaintiff initiated this action in United States District Court for a refund in the amount of $101,078.81.
The Commissioner denied the taxpayer's claim that the corpus of the life estate was not includable in the decedent's gross estate. The defendant also counterclaimed in the District Court for $23,691.92 in interest due on the deficiency.
The Commissioner based the inclusion of the life estate in Beatrice Brantingham's gross estate on 26 U.S.C. § 2041, which provides that a decedent's gross estate shall include "... any property with respect to which the decedent has at the time of his death a general power of appointment." 26 U.S.C. § 2041(a)(2). The Commissioner reasoned that in allowing his widow to "devote such of the corpus ... as in her judgment is necessary for her maintenance, comfort and happiness," Alan Brantingham had given her a general power of appointment over the life estate in question. Thus, the Commissioner concluded, the corpus of the life estate was part of Beatrice Brantingham's gross estate, and was subject to estate tax again.
As is the case with any rule, and particularly those found in the Internal Revenue Code, there are exceptions. Property over which the decedent has a general power of appointment is not included in the decedent's gross estate if the power to dispose of that property is "limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent." 26 U.S.C. § 2041(b)(1)(A). Presumably, the theory behind this exception is that if the decedent has been constrained in the manner in which she may dispose of property during her lifetime, it should not be considered part of her estate at death.
Plaintiff did contend that the ascertainable standard exception applied in response to the government's motion for summary judgment in the District Court. The central theme of plaintiff's argument below, however, was that it was inequitable to tax the corpus of Beatrice Brantingham's life estate twice, and that this is a result which Congress never intended. Plaintiff argues that in qualifying as a trustee and maintaining the corpus of the life estate intact, Beatrice Brantingham was relying on the Commissioner's finding that her rights to invade the corpus were limited. This limited access to the corpus, the taxpayer contends, precludes inclusion of the life estate in Beatrice Brantingham's estate.
The District Court, on recommendation of the United States Magistrate, entered summary judgment for defendant as to both the taxpayer's claim for reimbursement and the government's counterclaim for interest due. We reverse.
The taxpayer initially presents two arguments on appeal. First, the taxpayer argues that Congress intended that Sections 2056 and 2041 be read as interdependent parts of a single statutory pattern. He contends that Congress did not intend that a property interest be included in the original testator's estate and again in the spouse's estate. The spouse either exercises a sufficient degree of control over an interest to qualify for the marital deduction, in which case the remaining portion of that interest would be included in her gross estate; or she lacks sufficient authority over the interest to qualify for the deduction and the interest will not be included in her gross estate. Since the marital deduction was disallowed at the time of Alan Brantingham's death, the life estate would not be included in his widow's estate under this ...